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Samsung versus Intel continued

Last week’s post presented information on which to base an analysis of the Samsung versus Intel struggle. This week Domicity examines these differences and some significant implications for the broader IT industry.

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Samsung versus Intel — structural differences

Merchant market component sales account for just 35% of Samsung Electronics’ total revenue. This contrasts with Intel, which generates virtually all its revenue from merchant market component and related software sales.

Intel currently gets 93% of its revenue ($49.4-billion in 2012) from microprocessors and other logic devices. By comparison, Samsung Electronics generates an estimated 18% of its merchant market component revenue from logic devices — some $11-billion in 2012. It is Samsung Electronic’s market-leading memory chip and flat panel display businesses that push its total merchant market component revenue past Intel. (Another significant component business, producing lithium ion batteries, is run by a sister company to Samsung Electronics — Samsung SDI — which claims market leadership with FY2012 Lithium Ion battery revenue approaching $3-billion.)

Samsung has succeeded in developing a $30-billion business in flat panel displays for the merchant market, with a comparable volume supplied internally to Samsung divisions. This demonstrates how the company’s downstream product businesses help shape, and are in turn shaped by, its component operations. Strength in flat panel displays helps power Samsung’s competitiveness in televisions, computer monitors, mobile phones, tablets and notebook PCs. The company has further strengthened its position with the purchase of 3% of Sharp, which is a leader in production of very large — over 60-inch panels. Meanwhile, Intel has chosen not to turn its attention to the flat panel display market or to lithium ion batteries.

Samsung’s market-leading 35% share of the global memory semiconductor market helped deliver an estimated $19-billion in revenue in 2012. By comparison, Intel’s NAND flash memory business only generated about $1.5-billion.

There’s more profit in logic

Samsung is particularly intent on taking processor market share from Intel to boost both the revenue growth and profitability of its merchant market component business.

Although smaller, Intel’s logic-centered business has been able to closely track the revenue growth of Samsung’s merchant market sales over the past five years. Samsung needs to take significant Intel market share to change this dynamic. An even bigger attraction for Samsung is undoubtedly the much greater profitability of Intel’s business. Intel ’s 2012 operating margin was 27.4% (on operating income of $14.6-billion) compared to a less impressive 11.4% for Samsung’s merchant market component operations (on operating income of $6.8-billion).

Several key market dynamics are at the heart of the battle between Samsung and Intel for leadership in logic devices:

The rise of the ARM architecture — Low-power ARM processors from multiple suppliers are becoming increasingly pervasive, to the point where an ARM executive recently suggested Intel should abandon its x86 line and put its massive production capacity behind the ARM architecture. Despite much investment in its Atom low-energy architecture, Intel holds less than 1% of the market for mobile processors. ARM processors from Samsung, TI, Qualcomm, nVidia and others rule the smartphone and tablet market, as well as in hard drives, major swathes of consumer electronics, and other areas. And ARM is threatening to expand into PCs and servers. Intel will not abandon its Atom architecture and transfer its loyalties to ARM anytime soon. But Intel has to worry about Samsung’s use of ARM as a vehicle for growing its client-side and server-side processor businesses. Samsung has been boosting its US processor R&D investment and hiring engineers away from struggling AMD. And Samsung is gearing up for a deep dive into 64-bit ARM-based server processors, a likely prelude to a plunge into server, storage and networking systems for data center operators.

Production technology — Over the years, Intel has cited a consistent lead in semiconductor process technology as a critical weapon in its battle to maintain processor market leadership. The market is transitioning to FinFET, a new generation of transistor technology, designed to increase performance for very fine linewidths. Intel was first to commercialize FinFET-based technology in the third (Ivy Bridge) generation of its x86 processors. However, at the end of 2012, Samsung announced a 14-nm FinFET process for making advanced ARM processors for itself and ARM foundry customers, such as Qualcomm.

Comparative R&D budgets — R&D may be Intel’s greatest strength. The comparative income statement above highlights why Samsung will not have an easy time displacing Intel as the processor market share leader. Intel spends as much money on R&D to support its logic-centered semiconductor business as Samsung Electronics does for all nine of its component and downstream product businesses.

Apple — Samsung is the dominant producer of ARM-based application processors used in arch-rival Apple’s smartphones and tablets. This represents a key part of the estimated $8-billion in components that Apple purchased from Samsung Electronics in 2012. The increasingly intense competition between the two in smartphones and tablets is inducing Apple to wean itself off Samsung-made processors (as well as the large amount of semiconductor memory and flat panel displays supplied by Samsung to Cupertino). Samsung provides some 80% of Apple’s ARM-based logic and Apple is said to want to reduce this dependency to 20% by 2017. There was speculation that Apple would transfer most of its ARM foundry business to Intel. But instead, it appears that Apple has chosen TSMC as its Samsung replacement. If Apple’s ARM business had gone to Intel, it would have made it virtually impossible for Samsung to make up significant logic market share against Intel.

Expect the Samsung versus Intel battle to heat up

Intel is a superb competitor and has proven it knows how to hang onto market share, generating handsome profits in the process. On the other hand, Samsung poses the greatest-ever threat to Intel’s market position. This threat is compounded by the rise of ARM and the opening it provides to Samsung to take client-side and server-side processor market share.

In 2012, Intel saw total revenue shrink by 1.2%. Operating income declined 16.6%. Over the same period, Samsung’s component revenue grew 4.2% and operating income rose 18.2%. The decline in PC demand is negatively affecting both companies, but Samsung has been more successful at catching the transition to smartphones and tablets. Intel is moving to catch up with a new mobile strategy, introduced at the 2013 Mobile World Congress (MWC) in late February.

As the broader electronics/IT market transitions to low-power processors, we expect the race for logic sector dominance to go to Samsung within 10 years, unless Intel can make Atom a vastly more popular market solution than it is to date.

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Posted by Marc Brien, VP Research,DOMICITY LTD.

Domicity has published reports analyzing the strategies and operations of global I.T. leaders for more than two decades. Find out about Domicity’s latest report.In addition to published reports, Domicity consults on the strategies & operations of I.T. companies and market trends, and advises government on economic development and investment attraction opportunities.

Excellent analysis, thanks! Consider adding one more advantage to Samsung: In R&D it is not dependent on its own investments alone. It’s “the ecosystem.” Samsung is able to benefit from R&D provided by ARM, as well as by the EDA and physical IP companies (Synopsis, Cadence, Mentor in EDA), as well–and this is particularly crucial–its partnership with IBM and GlobalFoundries and the entire Albany, NY nano science complex in the “Common Platform” development for logic chips. And there is a great deal of university and government–funded research, e.g. at Berkeley EE department that invented finFET for DARPA, that goes into the ARM universe. In addition in software Samsung benefits from the Android ecosystem more than Intel does, because most of that ecosystem is focused on ARM-based software first.

Thanks for the input Jim … great stuff! With respect to the analysis in Domicity’s post, the “shared purpose” you cite serves to narrow Intel’s R&D spending bulge over Samsung for processor design and fab processes.